Holiday pay and commission: the EAT decision in Lock v British Gas

Yesterday the Employment Appeal Tribunal (EAT) handed down its judgment in Lock v British Gas.  Despite arguments that a decision in Mr Lock’s favour could be “potentially productive of injustice” the EAT concluded that the Working Time Regulations must be interpreted to make them compatible with the EU Directive – in this case by reading words into them so that holiday pay is calculated to include results-based commission.  

This is a key decision, with significant implications for employers.

The background

The underlying issue in these cases is the UK interpretation of EU law.  The right to paid annual leave is a principle of EU social law, but the Working Time Directive did not prescribe how holiday pay should be calculated. When the UK implemented the Directive, the Working Time Regulations prescribed that holiday pay be calculated in accordance with the ‘week’s pay’ rules in the Employment Rights Act.  Under these rules, workers with normal working hours will usually only be paid basic salary during annual leave.

In 2006, the Court of Justice of the European Union (CJEU) ruled that that ‘paid annual leave’ must reflect an employee’s ‘normal remuneration’ so as to ensure that he or she is not discouraged from taking annual leave.  In a series of cases since, this concept of ‘normal remuneration’ has been expanded upon and in the UK claims have been brought in the Employment Tribunal seeking its application.   

In Lock v British Gas, the issue was the inclusion (or not) of contractual results-based commission.  Mr Lock was paid a basic salary but earned much more in commission, which was based on the number and types of contracts he sold to customers.  This commission was results-based in the sense that it was based purely on the success of sales and not on his hours of work or performance otherwise.  He was not able to generate new contract sales while on holiday and his holiday pay was calculated by reference to his basic salary only.  
The rulings

The CJEU was asked to consider what the Directive required when calculating holiday pay.  It held that these commission payments would be taken into account under the Directive as otherwise Mr Lock was at a financial disadvantage when taking holiday, contrary to the principle of paid leave underlying the Directive.  

When the case returned to the EAT recently, the question was whether the domestic legislation (the Working Time Regulations) must now be read, with words implied into them, to make them compliant with the principles underlying the Directive.  

Yesterday’s decision was that it was both permissible and necessary to read into the Regulations to make them compliant with the Directive and CJEU rulings.  Mr Lock was held to have been entitled to holiday pay which included his results-based commission (his claim was for unlawful deductions from his wages).

The outcomes

This is a key decision, with wide repercussions.  Mr Lock’s claim was one of 60 joined together and there are 918 claims against British Gas alone, around the country.  The judgment also notes there are thousands of claims which are stayed within the tribunal system, waiting for this point of law to be decided.  

However, this case may yet be appealed and, if so, the position will remain uncertain for some time.  In the meantime, employers with concerns about holiday pay calculations or their potential exposure to tribunal claims should proceed carefully and take advice before making any adjustments. 

This article originally appeared on LinkedIn